The Washington, D.C., Public Service Commission rejected the proposed $6.9 billion merger between Baltimore Gas and Electric parent Exelon and its neighbor Pepco Holdings on Tuesday, taking advocates by surprise and sending the companies' stocks plummeting.
The merger had already been approved by five other regulatory agencies, including the Maryland Public Service Commission, which voted 3-2 to accept it in May. D.C. was the last jurisdiction to rule on the proposed merger. Exelon and Pepco have 30 days to ask for a rehearing.
The merger faced staunch opposition from a wide array of advocates, neighborhood groups, the Maryland Office of People's Counsel, the Maryland Energy Administration and Maryland Attorney General Brian E. Frosh, who all argued that it wasn't in the public interest.
But the companies argued that the merger would mean smaller rate increases in the future for BGE and Pepco customers as well as better reliability for outage-plagued Pepco customers and a faster storm damage response in both service areas.
In D.C., opponents packed the hearings on the merger and multiple City Council members voiced their opposition to it.
"The public policy of the District is that the local electric company should focus solely on providing safe, reliable and affordable distribution service to District residences, businesses and institutions," wrote Betty Ann Kane, chairman of the D.C. PSC, in her opinion. "The evidence in the record is that sale and change in control proposed in the merger would move us in the opposite direction."
The companies also failed to reach a settlement agreement with their opponents that might have mitigated the concerns, the commissioners wrote. They said the proposed merger generated more interest and participation than any other proceeding in the commission's more than a century of operations.
Exelon and Pepco executives are reviewing their options, the companies said in a joint statement.
"We are disappointed with the Commission's decision and believe it fails to recognize the benefits of the merger to the District of Columbia and its residents and businesses," the companies said. "We continue to believe our proposal is in the public interest and provides direct immediate and long-term benefits to customers, enhances reliability and preserves our role as a community partner."
State regulators have only rejected utility mergers outright twice before in the last three decades, according to Scott Hempling, former director of the National Regulatory Research Institute and an expert witness for the Maryland Office of People's Counsel.
Opponents lauded the decision while acknowledging that they did not expect it.
Calling it "a momentous day," Mike Tidwell, director of the Chesapeake Climate Action Network, a group that intervened before the PSC in Maryland against the proposed merger, suggested the three PSC commissioners must have been swayed by the persistently loud opposition.
"Without the widespread and intense opposition from grassroots and other quarters, the PSC almost certainly would have approved this," he said.
Pepco Holdings has 2 million customers in Washington and its Maryland suburbs and also owns Delmarva Power on the Eastern Shore and Atlantic City Electric in New Jersey.
All three D.C. PSC commissioners voted to reject the merger, though one, Willie L. Phillips, wrote a separate opinion in which he partly dissented. Details were not released Tuesday.
As in Maryland and in other jurisdictions, the D.C. PSC was required by law to approve the merger only if it was found to be in the public interest and that it would not harm ratepayers. The commissioners said they found the outcome would have been "mixed," citing bill credits for ratepayers as a positive.
But the commissioners said Pepco would become a "second tier company in a much larger corporation" that was more interested in its nuclear power plants than in serving customers.
Exelon is the largest owner of nuclear power plants in the United States, and opponents had argued that Exelon struck the deal to shore up the financial underpinning of those plants, some of which are unprofitable.
"At a time of change in the energy field," the commissioners wrote, "Pepco's ability to adapt will be constrained by an increased management bureaucracy."
Exelon and Pepco were hammered on Wall Street after the decision Tuesday, with Exelon's stock closing down 6.9 percent to $30.40 a share and Pepco's stock falling 16.4 percent to $22.52 a share.
The companies' next move was uncertain.
Susan Miller, an attorney who represented the Chesapeake Climate Action Network and Sierra Club in the proceedings in Maryland, said the companies could appeal the decision to the D.C. Court of Appeals, or they could spin off the D.C. ratepayers into a separate company, but she said that would probably require them to go through the regulatory process again in multiple states.
Karyl Leggio, a finance professor at Loyola University Maryland, said the companies could return with drastic changes to mitigate the commissioners' concerns.
"I don't think it's dead," she said. "This is not surprising because I think Pepco has a spotty service record and customers get concerned when they see companies scaling up, and D.C. residents organized and did a really good job. My guess is that they'll come back with an alternative plan that'll be more favorable to the ratepayers."